The Common Sense Investment Policy Statement

The Common Sense

Investment Policy Statement
Posted October 6, 2013 by Ben Carlson

Having a plan is important because its impossible to make rational decisions about investments without one. Larry Swedroe
An investment policy statement (IPS) is something every investor needs to be
able to achieve their long-term financial goals. Without one you are basically a
rudderless ship drifting across a vast ocean. Youll be lost.
An IPS is a written document that will be there to guide your actions and decisions during uncertain times. It becomes most useful to you at the extremes
of market action when human nature takes over and investors let the cycle of
fear and greed guide their decisions.
A little reminder in written form can keep you in check the next time we see a
bubble or a crash and your brother-in-law or work colleague is giving you market timing tips.
It can be a simple one pager that you review and update on an annual basis or
any time your circumstances drastically change (career, kids, new home, time
horizon, etc.).
Heres my common sense IPS along with some examples.
1. The purpose of my investment plan is
Examples:
Financial independence
Guilt-free spending in retirement
Annual vacations

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The Common Sense Investment Policy Statement

College education for my kids

All of the above
2. These are my expectations and goals
Examples:
My portfolio will fund my living needs for at least 40 years
I would like to leave $xx to my heirs
I would like to be able to pay the bills every month without worrying about
money
Provide $xx in monthly income
Id like to retire by age 55
3. This is my time horizon
Examples:
25 years retirement then 30 years after retirement
18 years until my child goes to college
A list of different time horizons for each goal
4. This is my target asset allocation
Examples:
75% stocks, 25% bonds with 20% in large caps, 15% in mid caps, 15% in
small caps, 25% in foreign stocks, 15% in a total bond index fund and 10% in
a TIPs fund
60% stocks, 30% bonds, 5% commodities, 5% cash
Be specific here
5. This is how diversified Id like to be
Examples:
No more than 25% in any asset class or investment
No more than 5% in my company stock
No more than 10% in any individual security
Enough that I hate some of my investments at any time
6. My stated risk tolerance is based on
Examples:

http://awealthofcommonsense.com/2013/10/common-sense-investment-policy-statement/

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The Common Sense Investment Policy Statement

I dont want to lose more than 20% in a single year no matter what
Im comfortable staying in stocks even after a 50% loss
My age/salary/time horizon/investment experience
I want to maximize gains
I want to minimize the chance of large losses
7. I will be rebalancing
Examples:
Every six months
When my asset classes move more than 3% from target
Once a year
After a 10% decline in any market
8. I will review my investment performance
Examples:
At month end
Every quarter
Once a year
9. These are my saving targets
Examples:
15% of my gross salary
75% of every bonus
90% of my tax returns every year
10. I aim to increase the amount I save
Examples:
By 3% every year
By half of my raise each year
By $25 a month until I reach my goal
11. I feel comfortable investing in
Examples:
Stocks, bonds and commodities

http://awealthofcommonsense.com/2013/10/common-sense-investment-policy-statement/

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The Common Sense Investment Policy Statement

Only mutual funds and ETFS

In both individual securities and ETFs
Only in index funds
12. I will never invest in
Examples:
Insurance-related investment products
Individual bonds
Exchange traded notes
Leveraged investments
Long-term investments with capital I need in the short-term for spending
needs
Products with fees over 1.5%
Anything I dont understand and cant explain in 30 seconds or less
13. The % of my portfolio I am comfortable investing in individual securities
Examples:
No more than 10% in individual stocks
50% of my portfolio but only if its diversified in 15 or more stocks
25% of my portfolio
Only an amount Im comfortable losing entirely
14. I will select my investments based on
Examples:
The size of the investment fees
The valuation of the investment
The fit within my portfolio
A combination of different factors
A set dollar cost averaging schedule
15. I will judge the success of my investment plan based on
Examples:
A simple index portfolio benchmark
The amount I save & invest annually

http://awealthofcommonsense.com/2013/10/common-sense-investment-policy-statement/

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The Common Sense Investment Policy Statement

My ending portfolio balance each year

The amount of income I am able to generate
Staying on track to reach my stated long-term goals
16. I will only sell investments
Examples:
When I rebalance
When they become overvalued
When there are better opportunities elsewhere in the markets
When I need cash flow for spending needs
After a minimum 2 year holding period
17. My investment philosophy summed up in one line
Examples:
I only invest in index funds
I invest aggressively to increase risk & reward
Im only looking for stable income
Im constantly on the lookout for undervalued assets
Im slowly building wealth through buy and hold
18. I will review and update my common sense IPS
Examples:
Annually or when my circumstances change significantly
Legendary football coach Bear Bryant once said:Have a plan. Follow the plan,
and youll be surprised how successful you can be. Most people dont have a
plan. Thats why its easy to beat most folks.
Thats the goal here. Have a plan. Look at it any time you are considering doing something out of the ordinary.
Further Reading:
Why you need an investment policy statement (CBS)
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http://awealthofcommonsense.com/2013/10/common-sense-investment-policy-statement/

23-03-2016